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16197 Advisers Report 0305 TWEEDY, BROWNE GLOBAL VALUE FUND TWEEDY, BROWNE AMERICAN VALUE FUND Correction Notice to March 31, 2005 Investment Adviser’s Report On page 10 of the Investment Adviser’s Report to Shareholders, we cite an analysis of Julian Robertson’s Tiger Fund based on a review of Daniel Strachman’s biography of Julian Robertson, A Tiger in the Land of Bulls. We incorrectly attributed an analysis of Tiger Fund’s performance to Chip Tucker of the Davis Funds. Chip Tucker did not make the analysis, but only forwarded on to us an email from Whitney Tilson of the Tilson Funds. Whitney Tilson is a frequent and very good commentator in the money management world. A more careful reading of Whitney Tilson’s email states that the analysis of Tiger Fund’s performance is from “…another friend----an old timer who prefers to remain anonymous.” Our apologies to Chip Tucker and Whitney Tilson. Both individuals are, in our opinion, reliable sources. July 12, 2005 jjjjjjjjjjjjjjjjjjj TWEEDY, BROWNE GLOBAL VALUE FUND Investment Adviser’s Report March 31, 2005 TWEEDY, BROWNE AMERICAN VALUE FUND jjjjjjjjjjjjjjjjjjj TWEEDY, BROWNE FUND INC. Investment Adviser’s Report Left to right: John Spears, Tom Shrager, Chris Browne, Bob Wyckoff and Will Browne. To Our Shareholders: We are pleased to present the Investment Adviser’s Report for the Tweedy, Browne Global Value Fund and the Tweedy, Browne American Value Fund for the fiscal year ended March 31, 2005. Investment results* for the last six months and fiscal year, along with results for the past three, five, and ten years, and since inception of both Funds are presented in the tables on the following page: 1 Period Ended Tweedy, Browne MSCI EAFE(1)(2) 3/31/05 Global Value Fund US $ Hedged 6 Months 11.65% 15.13% 10.59% 1 Year 14.75 15.06 11.55 3 Year 8.60 11.64 -0.52 5 Year 7.02 -1.15 -4.81 10 Year 13.15 5.41 7.04 Since Inception(3) 12.52 5.88 5.94 Period Ended Tweedy, Browne S&P 3/31/05 American Value Fund 500(1)(4) 6 Months 5.00% 6.88% 1 Year 4.18 6.68 3 Year 2.76 2.73 5 Year 5.47 -3.16 10 Year 11.72 10.78 Since Inception(3) 11.03 10.52 * The preceding performance data represents past performance and is not a guarantee of future results. Total return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance may be lower or higher than the performance data shown. Please visit www.tweedy.com to obtain performance data, which is current to the most recent month end. See page 19 for footnotes 1 through 4, which describe the indices and inception dates of the Funds. Results are annualized for all periods greater than one year. US market gains in the year ended March 31, 2005 were virtually all achieved during the quarter ending December 31, 2004 following the presidential election. The S&P 500 Index was approximately flat for the first two fiscal quarters, gained 9.2% in the third quarter and gave back 2.1% in the March quarter. Stocks outside the US as measured by MSCI EAFE hedged to the US dollar, which shows returns that are generally close to local market returns, were up in three of the four quarters of last year. MSCI EAFE in US dollars, the unhedged version of the index, achieved nearly its entire return in the December 2004 quarter when the dollar declined against most other currencies. In the most recent quarter ended March 31, 2005, our Global Value Fund gained 3.84% while MSCI EAFE in US dollars declined 0.17%, primarily as a result of a strengthening of the dollar against the euro and the yen. (More on the hedging debate is presented below.) In the most recent year, the Global Value Fund recorded a gain of 14.75% which was 320 basis points better than EAFE Hedged. Simply stated, our stocks 2 performed better than the stocks that comprise the index. EAFE in US dollars bested the Global Value Fund by 31 basis points due entirely to a declining dollar from year to year. However, this year-over-year decline in the US dollar was not linear. The hedged index and the unhedged index each “won” in two of the last four quarters. Deciding whether or not to hedge on a quarterly basis is not an easy task. Periodically, and at least annually, we like to analyze where we made our gains and where we lost money. Theoretically, the results of such an analysis would indicate whether certain stock sectors or investments in certain countries were better or worse than the overall return of the Funds. Perhaps this information would lead to conclusions that might help us manage the Funds in the future. Unfortunately, what works in theory may not work in practice. The two stocks that had the greatest positive impact on the Global Value Fund’s performance over the past twelve months were Jardine Strategic Holdings and Almanij NV.5 Jardine Strategic, a Singapore-based holding company with interests in Hong Kong real estate, automobile distribution and hotels, more than doubled last year. The share price most likely benefited from rising real estate values. Almanij NV is a Belgian holding company that controls KBC Bank. Holding companies are an arcane relic of European corporate structure. A shareholder who owned 51% of a holding company that in turn owned 51% of an operating company could effectively have voting control of the operating company by having an economic interest in only 26% of its shares. This was a common structure used to increase control of companies with only a limited investment. Ten or twenty years ago, many French companies had multiple holding companies to insure control with a small minority economic interest in the operating company. Holding companies typically trade at discounts to the underlying value of the operating company. In the case of Almanij, our estimate of the discount at the time of our investment was 35%. For more than two years, we suggested to the management of Almanij that they merge with the underlying operating company, KBC Bank. We argued that such a merger would increase liquidity in the shares of KBC Bank and increase the share price of Almanij. And for two years, the management said the controlling family had no interest in a merger because it would reduce their voting control of KBC from approximately 60% down to 34%. Finally, last year, the controlling shareholder let the merger take place and the shares of Almanij rose more than 70%. Jardine Strategic and Almanij are about as different as two companies can get. They are located 10,000 miles apart and operate in completely different businesses, yet they provided our largest gains. The only common characteristic we can discern is that they were both undervalued. The events that led to an unlocking of their value appear to us to be totally random. 3 We can reach a similar conclusion about the predictability of individual stock returns if we look at the Global Value Fund’s worst performing stocks of the previous year. The two stocks which had the greatest negative impact on the Global Value Fund’s results last year were Pfizer, the large cap global pharmaceutical company, and Shionogi & Co., a Japanese pharmaceutical company. Pfizer now trades at a price/earnings ratio that is approximately 70% of the price/earnings ratio of the S&P 500 despite the fact that we believe pharmaceuticals are a much better business than the average company in the index. Pharmaceutical stocks in general did not do well last year. The two stocks in the American Value Fund which contributed most to its performance were GATX Corp., which leases rail, tank and freight cars as well as aircraft, and ProQuest Company, which publishes content such as scientific journals for libraries and provides technical information for the automotive dealer industry. GATX’s share price rose nearly 50% last year in anticipation of a recovery in the leasing business. ProQuest’s shares rose nearly 24% last year as it came into favor with street analysts when its business shifted into more educational products. The American Value Fund’s biggest dogs last year were Pfizer and MBIA Corp., an insurer of municipal and corporate bonds. Despite meeting earnings targets and a price/earnings ratio less than 10X, the share price of MBIA fell 16.6%. MBIA has been the object of numerous rumors about its accounting and financial condition that, to date, do not appear to be true. Discerning which stocks will perform the best and which will perform the worst in any limited time period such as a year is a task way beyond our capabilities. And searching for any common characteristics among the best and worst stocks does not produce any obvious conclusions. The only common characteristic we strive for in our stocks is that they should be cheap relative to their intrinsic value. But just being cheap is no assurance that a stock cannot get even cheaper, or that some unforeseen event may have a negative impact on a particular company’s intrinsic value. Fortunately, it has been our experience in the past that the unforeseen, what we call “event surprises,” is more often positive than negative.
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